Reference no: EM1359877

How can a government be tempted to take a benefit cannot afford? What sounds better, $250,000 of increased services or $187,500 less in expenditures? Let's look at an example where this paradox comes into play. The City is in a tight fiscal squeeze with lots of miles of roads with potholes. Current street repair operating efficiency:

$10,000 labor cost per lane mile
7,500 material cost per lane mile
$17,500 per lane mile

The current number of laborers at this level of operating efficiency yields 75 lane miles of repairs per year. The City Council will not allow the Highway Department to hire more laborers at this point. The highway engineer has searched for a method to increase efficiency in lane mile road repair. One day, while nursing his ulcer, he came across a process in the road repair literature, a suggesting a way to achieve a 33 percent efficiency increase so that:

The existing crew can do 100 miles with same effort resulting in a labor cost per lane mile (the unit cost) of $7,500

The cost per lane mile will be reduced by $2,500

$2,500 per lane mile times 100 miles = $250,000 total value of increased efficiency.

The budget officer was excited by two things: 25 more miles of lane repair for the coming fiscal year $250,000 of total benefit. The budget officer pushed the Council to purchase this process at the budget hearings and ultimately convinced them.

The highway engineer was delighted and in the next year repaired 100 miles of road instead of 25. Indeed, both efficiency and his ulcer improved until he got the final bill and a pink slip from the City Council. The "improved" program actually cost $187,500 over the previous year. Huh? Why? Using the existing information, explain to the highway engineer his and the budget officer's error in analyzing costs.